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China NPC Examines Corporate Tax Law

by Mary Swire,, Hong Kong

09 March 2007

Chinese lawmakers yesterday began considering a key tax reform that will result in foreign-invested enterprises and domestic companies paying the same amount of corporate tax.

The proposed law, which was put before the tenth National People's Congress, China's highest legislative body, would unify corporate tax at a rate of 25%. While this would mean a cut in tax for domestic firms, foreign-backed companies would likely see their tax bill increase.

Currently, while the rate of corporate tax is nominally the same for all firms, foreign companies can take advantage of various tax breaks and investment incentives to whittle their effective corporate tax rate in China down to as little as 10%. However, domestic companies cannot avail of such measures and must pay corporate tax on their profits at a rate of 33%, a situation that lawmakers say has become increasingly unfair.

"It is necessary to unify domestic and foreign-funded enterprise income tax as soon as possible," Finance Minister Jin Renqing argued in a report distributed to members of the NPC, noting that Chinese firms will continue to be at a "competitive disadvantage" if the current dual corporate tax policy remains in place.

The new law is expected to be approved by the NPC, and could go into effect by January 1, 2008. It is thought that foreign companies are in broad support of the new law, as long as it is applied on a level playing field. However, the foreign firms are still expected to benefit from certain tax breaks under the new legislation, although these are likely to be more targeted to encourage investment in certain industries such as information technology and 'green' industries. Local firms could also benefit from these breaks.

While the government says it is prepared to swallow the reduction in tax revenues brought about by the unified corporate tax, the impact on revenues is expected to be relatively small. Jin also noted that a 25% corporate tax rate would still mean that China is competitive on tax compared with other economies in the region.

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